As tax law is very complicated, this article is intended only for educational or illustrative purposes and should not be construed to communicate legal or professional advise. You should contact us with any specific questions so we can properly interpret how the tax laws applies to your situation. Killingbeck Tax Preparation, Kokomo, Indiana. 765-452-8000.

How to Save with 28 Federal Tax Deductions!

We have put together for you the below listing of the basic rules for tax deductible savings from some 28 Federal Tax Deductions. (For additional tax savings laws, please see our listing of Federal Tax Credits and State Tax Deductions and Credits under our Tax Preparation listing.)

The tax deductible savings you receive by claiming a Federal Tax Deduction depends on your top tax bracket. For example if you are in the 15% bracket, when you add the state savings, you generally will save about 20% of your deduction. If you are in the 25% bracket, you will save around 30%. Now if your income is low and you are in the 0% tax bracket, unfortunately the way the system is designed you won't have any tax deductible savings. Let us know if you have questions. Killingbeck Insurance, Kokomo Indiana, 765-452-8000.

Educator Expense Tax Deduction.

1. Teachers’ classroom expenses can be tax deductible without itemizing up to $250 for unreimbursed qualifying expenses. (up to $500 if both spouses are teachers)
   • A. Eligible teachers include K-12, counselor, principal, or aid who worked at least 900 hours during the school year. Home schooling does not qualify.
   • B. Eligible tax deductible expenses include books, supplies (other than non-athletic supplies for health or physical education),computer equipment, other equipment, and supplementary materials used in the classroom.

Reservists, Perfoming Artists, Fee Based Government Employees Tax Deduction

1. Overnight Travel for Reserve & Nat. Guard Reservists & Guard who stay overnight more than 100 miles away from home get a tax deduction for unreimbursed travel expenses (transportation, 50% of meals, lodging). Must complete form 2106.Tax deductible is limited to regular per diem rate for lodging and food.
2. Qualifying performing artists get a tax deduction on form 2106 expenses. A qualifying artist is a person who is an employee of 2 or more employers, earned at least $200 from such employment & AGI must be less than $16000 before expenses and business expense exceed 10% of business income. Must attach form 2106
3. State and local officials paid on a fee basis get a tax deduction for unreimbursed business expense. Use form 2106.

Health Saving Account Deduction (HSA) Income Tax Deduction

                    1.Taxpayer must be covered by a qualified high deductible plan of 

     a.  Individual $1200($1200 2012) maximum $5950($6050 2012)                

     b.  Family $2400($1200 2012) maximum $11,900($12100 2012)  at work or has their own qualifying high deductible medical plan.

      (There is no requirement to have earned income.)  

  2.  Must Not be covered by Medicare or other medical plan   


               (except a  health plan for dental and vision)

  3.  Taxpayer cannot be a dependent.

        4.  Taxpayer & employer can contribute up a total of:


            A.  2011 self only $3050 ($3100 2012), family $6150($6250 2012)  

          55 and older can contribution an extra $1000 per plan.   

     B.  Do not have to prorate yearly amount for months in plan if in

          plan for another year.

     C. Can make deduction till April 15^th.

        5.  A HSA can pay for all Sched. A medicals costs.

        6.  Can rollover 1 time money from IRA to HSA.  Amount rolled  

      over is  limited to yearly contribution limits.
1. .

Moving Expense Tax Deduction

Easy to miss this tax deduction, watch W-2 addresses

1. Moving Expense are expenses for starting a new job, even a first job, or a change of job location.Can claim even if delay in making final move. (up to 1 year, longer for family.)
2. Employer paid moving expenses should not be included in the W-2 unless they are non-deductible expenses or excess reimbursements.
   • a. Tax free Reimbursements are coded as code P.
   • b. Only get a tax deduction for taxpayer paid expenses.
3. Requirements to be tax deductible:
   • A. Distance between new job location & former home must be at least 50 miles more than the distance between your old job and old home.
     1. If first time job or job after break in employment, must be over 50 miles from old home.
     2. The main job location is where you spend most of your work time or where work is centered.
     3. Exception: Armed forces don't have a distance rule but must be due to a change of station.
   • B. Tax deductible expense must be within one year from the time they first reported to work at the new location unless you can show circumstances prevented.
   • C. Time Requirement for tax deduction: One spouse must remain & work full time in the new area for at least 39 of 52 weeks. Self-employed is 78 weeks during 2 years.
     1. No time test requirement for armed forces, for loss of job due to disability-death-layoff (unless willful misconduct), transfer for employer’s benefit, or move to U.S. due to retirement or as a survivor.
     2. Temporary absence for illness, strikes, layoff, natural disaster & vacation are consider working.
     3. Seasonal Unemployment is considered working if less than 6 months & covered by a contract.
     4. If taxpayer plans to meet the time test, go ahead and claim a tax deduction for moving expenses.Amend if they leave early.
4. Tax Deductible Expenses of Moving Are:
   • A. The costs of moving personal effects is fully tax deductible. Examples: Hauling, truck rental, packing, moving services, moving insurance,& in transit storage within 30 days of moving.
   • B. Traveling costs of household members is a tax deduction.
     1. Don't have to travel together to deduct costs. But can deduct just one trip per person.
     2. Travel cost include: Lodging, airplane, bus, actual auto expenses for gas (or 19¢ per mile 1^st half of year, 23.5¢ last half of year)  plus parking fees-tolls.

        Meals are not tax deductible.

     3. You can also take a tax deduction for expenses of the day you arrive & expenses in the area of your former home within a day after your furniture was moved.

Self-Employment Tax Deduction

You can claim a tax Deduction for a portion of self employment tax paid on Schedule SE.

Our tax program automatically computes the proper tax deduction from Schedule SE.

 

Self-Employed SEP, Simple or Other Qualified Pension Plan Tax Deduction

SIMPLE Pensions are special type of IRA set up by your employer (or by taxpayer if self employed):Maximum tax deductible amount for a Simple plan for 2011 is $11,500 or $14,000 age 50 or older.

SEP's: (Simplified Employer Pensions) Can take a tax deduction up to 20% of Self employment income up to a maximum of $49,000. | Uses 401k plan rules.

 

Self-Employed Health Insurance Tax Deduction

1. Self-employed & Sub S shareholders can take a tax deduction of 100% of the premiums paid for health, medical, dental & long term care insurance for themselves, their spouse, & dependents up to the amount of earnings.
2. Requirements for a tax deduction:
   • A. Self-employed individual can not be eligible to be covered under the employer’s (or the spouse’s) subsidized health insurance plan. If covered only part of a year, can take a tax deduction for other months.
   • B. The tax deduction can’t exceed net self employment.
3. For 2010 this tax deduction can be taken as a deduction in calculating Self Employment Tax.
4. Can take a tax deductions for the cost of insurance you paid for child under 27 even if they are not a dependent.
5. Deduction can't exceed net profit less deductions for Self Employment and retirement contributions.

Penalty for Early Withdrawal of Savings Tax Deduction

The 1099INT will show the interest penalty on early withdrawal from savings plans. You get to claim this as a tax deductible item.

Watch for these closely as they are easy to overlook.

 

Alimony Paid to Others as a Tax Deductioin

We see just a little alimony in Indiana (mostly child support). If you think it might be alimony, ask if divorce decree ties payments to child or event in child's life. If so, payments are child support and not alimony.

1. Must include x-spouses name & SS # on front of return.
2. Required Payments such as tuition, medical bills mortgage, taxes or insurance on a jointly owned home could be alimony and be tax deductible if it meets all the below requirements..
   • A. If nonresident spouse pays and they are a co-owner, only ½ may be alimony. (the other half they deduct as their own interest & taxes)
3. Requirements for alimony to be tax deductible.
   • A. Payment must not be treated as child support & parties haven’t designated the payment isn't alimony (such as a property settlement)
   • B. X/spouses are not living in the same household.
   • C. There is no liability to make payment after spouse’s death.
   • D. Payment must be made in cash or equivalent (no property transfers) each of 3 post separation years.

   Must recapture tax deduction if payments fall by $15,000.

IRA Tax Deduction

Regular IRA Eligibility Requirements to make a tax deductible contribution to an IRA

1. Must have earned income. (exception below for a nonworking spouse. )
   • A. Unemployment is not earned income.
   • B. For self-employed, net income is earned income
   • C. Alimony received counts as earned income.
   • D. Military individuals can consider nontaxable combat pay as compensation for IRA purposes.
2. Must be under age 70 1/2 (at year end) to put money into an IRA (exception below for the nonworking spouse)
3. Contributions must be made during the year or up to April 15th of the next year to be tax deductible.
4. Active participants in another pension plan may not be able to full tax deduction according to below rules.
   • A. The W-2 usually indicates whether they are in an active plan. If wrong must have employer corrected W-2 or IRS won’t allow.
   • B. You are not considered active if receiving benefits from a former employer's plan or no contributions were made for you
   •     1. Exception:  Defined benefit plans that don’t keep separate accounts for each person, are active if covered by plan whether
   •         contribution is made or not.
   • C. For active Participants in a pension plan the amount of tax deductible contribution phases out between:
     • $56,000 to $66,000 for single or HH.
     • $90,000 to $110,000 for Married Joint.
     • $0 to $10,000 for Married filing separately.
     1. AGI limit adds back student loan & tuition deduction. Taxable Social Security also impacts AGI.

     Active participants can still put money in an IRA even though they may not be able to take a full tax deduction for it. Must keep track of nondeductible contributions. It is often better to do a Roth IRA.

   • D. If one spouse is an active participant other spouse is not the amount the non-active spouse can take a tax deduction for phases out at:
     1. $167,000 to $177,000 joint.
     2. $0 to $10,000 married filing separately (unless you lived apart the entire year, see below).

Regular IRA Limitations to claiming a tax deduction

1. IRA Contribution Limitations to being tax deductible.
   • A. An individual may contribute the lesser of $5000 or earned income.

     If age 50 or older you can tax a tax deduction of $6000.

   • B. If a nonworking spouse & a joint return, Taxpayer can split

     contributions putting up to a maximum of $5000 ($6000 age 50 or older) in either or both spouse's.

   • C. A person with wages and a business loss can disregard the business loss in figuring this limit. A gain can be added to wages.
2. IRA Rollover Rules. Rollovers are not tax deductible.
   • A. Only allowed one rollover a year. This applies separately to each IRA they have. A transfer of funds directly to the other bank is not restricted to once a year limit.
   • B. Transfer must be done within 60 days or it is a taxable distribution.
     1. Can ask IRS for exception if beyond taxpayers control.
     2. A 120 day rollover is allowed on failed first time home purchase.
   • C. Can rollover into IRA from employer plan, 401K, 403b, etc.
3. If Nondeductible contributions are made or were made in the past, must complete 8606 in the year you do it and keep track of it for the future.
4. Excess contributions are not tax deductible and are subject to a 6% penalty each year. If withdrawn before Oct 15^th of following year, excess contributions are treated as not being made.

SEP's (Simplied Employer Pension) & SIMPLE Pensions Tax Deduction

are a special type of IRA set up by your employer (or by taxpayer if self employed): You are not allowed to take a tax deduction on your tax return as you receive the tax savings in your paycheck.

• A. Maximum contribution for Simple plan is for 2011 $11,500 or $14,000 age 50 or older.
• B. Maximum contribution for SEP is 20% of self-employed income up to $49,000.

Roth IRA’s Rules Tax Deduction

1. Roth Contributions are not tax deductible but you receive a tax benefit as qualified distributions from a Roth are not taxable.
2. Roth includes Roth IRA, Roth 401K and Roth 403B
3. Contributions are limited to lesser of $5000* or earned income.
   • *A. Taxpayers age 50 can contribute an extra $1000
   • B. Can contribute up to $5000 to non-working spouse’s IRA.
   • C. The $5000 limit (or $6000) applies to total of all IRA’s
   • D. Roth 401K are subject to 401K limits (no income limits!)
4. Does not matter if active participant in another pension plan.
5. Allowable contribution phases out at AGI* (no limit or 401K):

   $169,000 to $179,000 for joint filers.

   $107,000 to $122,000 for single filers & HOH.

   $0 to $10,000 married filing separately who lived with spouse during the year.

   *Must add back student loan & tuition deduction for AGI.

6. Can make contributions after 70½ if earned income.
7. Taxpayer does not have to start withdrawing from Roth at age 70½.

   Must begin at taxpayer’s death.  Tax free to beneficiary.

8. Can make contributions up till April 15^th.
9. The earnings portion a of Roth IRA is tax free if taken after a 5 year holding period and at age 59 ½. Holding period for all Roth IRAs a taxpayer has, starts on the Jan. 1^st of the first year contributions were designated for any Roth IRA.
10. Early withdrawals from Roths are taken first from contributions*, which is not subject to tax or penalty.
    • A. Exception: Withdrawal on Roth 401K a portion of earning is taxable based on earnings allocated to the account. Can rollRoth 401K to Roth IRA to get around this.
    • B. Withdrawal of earnings before 2 years is subject to tax and 25% penalty.2 to 5 years has 10% penalty (exceptions to penalty are under income section in the pension listing.
11. Can rollover regular IRA, 401K, 403, 457 to Roth IRA if pay tax on taxable part of Regular IRA & meet requirements.
    • A. Rollover Requirements:
      1. There is no longer a $100,000 AGI limit to rollovers.
      2. Can now be filing MFS
      3. Can’t be from Simple plan during first 2 yrs.
      4. Not from a required distribution over age 70 ½
      5. Rollovers subject to new 5 year rule to avoid 10% penalty.
    • B. A 2010 conversion can be taxed half in 2011 and 2012 unless
      1. Taxpayer elects to be taxed in 2010.(box to check on 8606)
      2. A distribution taken from plan reduces 2012 taxable amt.
      3. Basis in plan reduces 2012 taxable amount.
12. Recharacterization of converted IRA. Can go back to original IRA before Oct. 15 of following year. >Must be a trustee to trustee conversion. Must attach a statement from broker showing the change.
13. A loss on a Roth is only tax deductible when total amount is taken out of account.A loss is deducted as a 2% itemized tax deduction.

Education ESA and 529 Education Plans Tax Deduction

1. Both Coverdale Education ESA (use to be called Coverdale IRA) and 529 Plans are non tax deductible plans where interest earned on account is tax free when withdrawn to pay education expenses.
2. Usually better to use a 529 plan than a Education ESA unless using for K-12 education expenses. With Education ESA when child turns 18, the money is the child’s to spend. With 529, parent keeps control. Plus if Indiana College Choice 529 you get a 20% credit up to $1000.
3. QUALIFYING EXPENSES for both plans include: tuition, fees, tutoring, special need services, books, supplies, equipment, room and board up to rate set by college, costs of computer equipment and internet access.
   • A. Both plans cover College and Trade school costs.
   • B. Education ESA expenses in addition apply to public, private, and religious schools providing K-12 education.
4. Limit to contribution.
   • A. 529 no limit to contribution.
     1. Must be deposited in 529 account before 12-31.
     2. Must leave in account for 12 months.
     3. No income limits on deduction.
   • B. Education ESA can only contribute up to $2000.
     1. Deadline for contribution is April 15^th.
     2. Any individual can contribute to this account for a child. (Maximum of $2000 per beneficiary)
     3. Must be made to a child’s account who is under age 18.
     4. The maximum that can be contributed is phased out if contributor’s AGI is:
        • a. $190,000 to $220,000 for a joint return.
        • b. $95,000 to $110,000 for single return. HOH, MFS, QW
     5. Distributions are tax free if used for education.
        • A. 529 distributions if taxable are reported on parent’s tax return as other income.
        • B. Education ESA are reported on child’s return if taxable as other income.
        • C. The Earnings part of the Distributions not used for education purposes are taxed as other income and penalized 10% (unless they qualify for exception).
        • D. The balance of education IRA not used for education purposes by age 30 must be distributed within 30 days of reaching age 30.
        • E. Losses on total distributions are deducted as 2% misc. Item. Ded.

401K & Plans with Employer Tax Deduction

Individuals can make contributions into an employer provided 401K plan, 403B, 457 plan or Roth 401K.,Roth 403B

These amounts are already deducted from wages on the W-2 where they receive the tax savings. Note the SS income is higher for these individuals.

Maximum

• 401 K contribution for 2011 is $17,000 or $22,500 age 50+
• 403 K contribution for 2011 is $17,000 or $22,500 age 50+

Student Loan Interest Tax Deduction

Requirements to be tax deductible.

1. Must be from education expenses for
   • a. A student who was enrolled at least ½ time
   • b. And working on a degree.
2. The taxpayer must have the primary obligation to repay the loan to take the tax deduction.
   • a. Parent’s Can’t deduct interest on dependent’s loan!
3. The loan must be for the benefit of
   • a. taxpayer or taxpayer’s spouse or
   • b. for a dependent (or who was a dependent at the time the loan was taken out.)
   • c. any person you could have claimed as a dependent for the year the loan was taken out except that person filed a joint return, their gross income was over $3750 or you could be claimed as a dependent.
4. A dependent can not claim the tax deduction. If loan is in dependent’s name, no one can claim.
5. The maximum tax deductible amount is $2500.
6. Deduction phases out at income levels of
   • $60,000 to $75,000 single,
   • $120,000 to $150,000 joint.
7. Can’t claim if married filing separately
8. Can be any type of loan (except from a relative).
   • A. If a credit card or home equity loan was used, must be able to separate the interest from the other loans.
   • B. It includes loans that cover room and board.

Tuition and Fees Tax Deduction

Often it is better to claim an American Opportunity Credit or Lifetime Learning Credit. See "Federal Credits that Save" in the Tax Preparation Menu.

1. Taxpayer can only claim if they paid expenses and claimed the child. Youth can only claim the tax deduction if they paid and claimed themselves.
2. Can't claim if married filing separately.
3. Not allowed a tax deduction if
   • A. Taxpayer is a dependent (parent claims then).
   • Parent can claim only if parent actually paid the expense.
4. AGI phase-out and Tax Deductible Amount

   Single, HH, QW	MFJ	Deduction Limit
   $0 - $65,000	$0 - $130,000	$4,000
   $65,000 - $80,000	$130,001 - $160,000	$2,000
   Over $80,000	Over $160,000	$0

   The deduction is $4000 per return. ($2000 in phaseout range)

5. There is no requirement to be a full time student.
6. Must be for higher education expenses of current year or 1st 3 months of next year for taxpayer their spouse, or dependents for higher education costs. Eligible expenses are the same as American Opportunity Education credit.
7. Can choose either to take a tax deduction or tax credit by student but not both on same student.
8. Now must complete form 8917 to claim tax deduction.
9. Must add back deduction on the Indiana return.

Domestic Production Activities Tax Deduction

1. To encourage manufacturing and other production in the U.S., taxpayer can claim 9% in 2010 of the lesser of
   • A. Qualified production activity
   • B. Modified AGI whichever is smaller.
   • C. 50% of W-2 wages related to activity during the year.
2. Use form 8903 to determine the amount that is tax deductible.
3. Includes construction, renovation of real property,manufacturing, engineering & architectural.
   • A. Can’t take tax deduction on land portion.
4. If taxpayer does other activities, must prorate income and expenses between items that qualify for domestic production tax deduction and those that don’t.
5. Start with gross receipts.  Deduct cost of good sold an d other expenses.  Deduction is limited to 50% of wages.

Other Deductions Tax Deductions

1. Repayment of Subpay-TRA Tax Deduction (Trade Readjustment Allow.)
   • A. Do not deduct under unemployment. (Causes IRS letter)
   • B. If amount is under $3000, deduct subpay repayment as a marginal entry on the "total adjustments line."
   • C. If the amount is over $3000, can deduct from total adjustments or can recompute the earlier year’s tax& deduct credit on back of 1040 at line 70 writing "IRC 1341" on line.
     
     
2. Other Repayments (not including social Sec.):

   Repayments depend on type of income you included in prior year.  You generally deduct on same form on which it was previous reported. 

        For wages, unemployment and other nonbusiness income
   • A. Income and Repayment in same year. Reduce the taxable amount by the income repaid and report the difference.
   • B. Repayment Under $3000 of Prior Year Income. Report on the form it was originally reported on. If reported as wages, unemployment, report on Sch. A as 2% miscellaneous itemized tax deduction
   • C. Repayment Over $3000 of prior year income. Report either as:
     1. Report as misc. itemized tax deduction not subject to 2%.
     2. Or take as credit on line 70. See line 70.
3. Expenses of Rental of personal property tax deduction Deduct expenses here up to the amount of income.
4. Jury Duty paid to employer tax deduction: If required to give jury duty to employer, enter amount in marginal entry the tax deductible amount.
5. Attorney Fees & Court cost for unlawful discrimination suits is tax deductible here up to amount of aware included as taxable income.
6. Death of Military or US Civilian Employees who die from terrorist or military action, their taxes are forgiven for year of death and all years beginning with the year before injury. It will be deemed you paid $10,000 in tax payments. Write “KITA” in big letters across the top of the 1040.
   
   
7. Foreign Earned Income & Housing Tax Deduction Exclusion

     A.  In deciding to claim this exclusion, you should compare the overall tax with the exclusion to the tax by taking the foreign tax credit.

    

     B.  U.S. Government pay is ineligible for exclusion.

    

     C. Qualifies if US taxpayers tax home is in a foreign country 330 days out of any 12 months (prorated for partial year if stays over 330 days over 2 years),

    

     D.  They may be able to exclude up to $92,900 of earned income ($185,800 if joint and both work).  Use form 2555.  

    

     E. Also may be able to claim housing exclusion on expenses that exceed taxpayers base rate which is $14,964 to $27,870 depending on location.  Can be higher if working in high cost area. IRS notice 2010-27 provides a table of foreign locations with higher limits. 

        1.  Housing costs include rent, utilities, parking, furniture rental.

        2.  Can only deduct housing up to taxable foreign income.

        3.  Self employed have special rules

          F.  Earnings are still subject to Social Security if American employer.
   
   
8. Reforestation amortization and expenses tax deductible.
9. Contributions to section 501c (18)(D) pension plans.
10. Contributions by certain chaplains to section 403(b) plans.
11. Legal costs of taxpayers who turned in atax evader up to amount of income included as tax deductible.

Adjusted Gross Income

This figures carries to the State of Indiana as the starting point for income.

Give us a call if you have questions or we can be of help, 765-452-8000.  Killingbeck Insurance & Tax Preparation, Kokomo, Indiana.